Asset Managers Got Opportunistic — With Each Other

M&A has surged this year, as investment firms scramble for scale and deals.

Alex Kraus/Bloomberg

Alex Kraus/Bloomberg

Transactions between asset managers reached $19.7 billion in the first half of 2020, up almost 50 percent from the same period last year, according to PwC’s mid-year report published on Thursday.

Investments in asset and wealth managers exploded, even though activity slowed substantially during March and April — the height of the economic shutdown. The PwC report looked at U.S. managers acquired by other American firms and foreign companies.

Gregory McGahan, PwC financial services deals leader and a report author, expects that M&A will continue to flourish in the second half of the year. With the economic slowdown and uncertainty over the future, investors have kept up pressure on managers over fees. Managers are also racing to buy firms with some of the asset classes that have done well recently, including private credit.

PwC argued that investors had the temerity to circumvent travel restrictions and other logistical problems because market volatility, economic uncertainty, and investor redemptions posed a bigger problem long term. “Some buyers swooped in on opportunities that emerged as Covid-19 intensified new or persistent problems in the market, including fee compression,” wrote McGahan and Arjun Saxena, deals strategy leader for financial services.

The quest for scale and products such as ESG (environmental, social and governance) oriented strategies will drive transaction, the authors predicted. There will be plenty of managers looking to sell, even though, as PwC said, “not all of them are attractive acquisition targets.”

The buying up of minority stakes in asset managers will also continue. Private equity and real estate firms are sitting on huge cash commitments from investors raised before the pandemic. Private equity funds that take stakes specifically in alternative managers are also very active, increasing competition for investments. “Some sellers probably will benefit from competitive bidding and continue to have an upper hand during price negotiations,” according to the report.

The consultant expects the SPAC (special purpose acquisition companies) trend to continue, pushing some of the deal activity. The blank check companies use the proceeds from an initial public offering to raise cash for an acquisition. Even though SPACs ran into trouble in the global financial crisis, top firms are gearing up such vehicles.

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Money market funds, which have struggled with low interest rates and liquidity problems in March and early April, will also likely be put on the block. Managers have had to waive fees on the normally lucrative funds to keep rates above zero. Without scale, it’ll be hard for firms to remain profitable.

“With yields low and forward interest rates suggesting that fee waivers will likely continue during the next two to three years, several sub-scale money market fund players may seek to reconsider their position in this market. We expect that some financial institutions that lack scale or a strategic reason to offer MMFs could review their options and decide to sell,” according to PwC.